Perhaps you have heard of crypto mining for some time now—from the news, to online ads, and even from your tech-savvy friends. But, how exactly does it work? Do you need to be a cryptocurrency trader to get involved? If not, how can you start mining crypto?

First Things First

Prior to delving into the inner workings of crypto mining, it’s important to understand that cryptocurrencies aren’t physical coins that a miner can find like in old Western movies. Cryptocurrencies are digital assets that use cryptography to secure their transactions and control the creation of new units. Bitcoin, the first and most well-known cryptocurrency, was created in 2009.

Crypto mining is the process by which a new cryptocurrency is created. Miners—people who run mining software on their computers—compete with each other to solve complex mathematical problems. The first miner to solve the problem gets rewarded with a certain amount of cryptocurrency. 

The process of solving the math problem is called “hashing.” Miners use special software to hash data from transactions on the blockchain—the ledger that records all Bitcoin transactions. As more and more miners join the network, math problems become more and more difficult to solve. This is intentional; it’s what ensures that there’s no inflation in the cryptocurrency supply. 

Whenever a new block of transaction data is added to the blockchain, all the miners on the network race to be the first ones to hash all that data and add the block of transactions to the blockchain. The miner who succeeds in doing this gets rewarded with cryptocurrency. 

The entire process is designed so that it becomes more and more difficult (and therefore expensive) to mine cryptocurrency as time goes on. This ensures that there’s no inflation in the supply of the cryptocurrency. It also makes crypto mining a very competitive business; only those with expensive, specialized hardware can hope to turn a profit at it. 

Potential Risks and Challenges

While crypto mining can be profitable, there are also potential risks and challenges that miners need to be aware of. 

1. Energy consumption

One of the biggest challenges with crypto mining is the vast amount of energy it consumes. The energy requirements for crypto mining are so high that, in some cases, it’s not even sustainable in the long term.

For example, Bitcoin mining is estimated to consume around seven gigawatts of electricity by the end of 2018—that’s more than the entire country of Austria! As more and more people get involved in crypto mining, the energy requirements will only continue to increase. This poses a serious challenge for both miners and the ecosystem as a whole.

2. Difficulty level

Another challenge with crypto mining is that the difficulty level keeps increasing as more people get involved in mining. The difficulty level is what determines how much computing power is needed to solve a block and add it to the blockchain. As more people get involved in mining, they add more computing power to the network, which in turn increases the difficulty level. This can make it difficult for individual miners to compete against large mining pools and can ultimately lead to the centralization of power within the network.

3. ASICs and FPGAs

Application-specific integrated circuits (ASICs) and field-programmable gate arrays (FPGAs) are specialized hardware designed for crypto mining. They are much more efficient than general-purpose CPUs when it comes to mining cryptocurrencies.

However, they are also quite expensive, which puts them out of reach for many would-be miners. This further exacerbates the problem of centralization because those who can afford these devices have a significant advantage over those who cannot.

4. Competition from big companies 

Another challenge crypto miners face is competition from big companies. These companies have access to large amounts of computing power and can out-compete individual miners. Large companies can also negotiate cheaper rates for energy. This puts individual miners at a disadvantage and makes it difficult for them to compete. 

To combat this, some miners have formed mining pools. A mining pool is a group of miners who combine their computing power in order to increase their chances of solving blocks and receiving rewards. By pooling their resources, miners are able to compete with big companies. 

The Future of Crypto Mining

It’s hard to say exactly what the future holds for crypto mining. However, there are a few possible scenarios that could play out. 

Scenario 1: Crypto mining remains centralized.

In this scenario, crypto mining continues to become more and more centralized as large-scale mining operations continue to grow larger and smaller miners are forced out of the market. This would lead to even higher profits for those who are able to remain in the business but would make it virtually impossible for new miners to enter the market. 

Scenario 2: New technologies emerge.

Here, new technologies are emerging that make it easier for small-scale miners to compete with large-scale miners. This could level the playing field and lead to a more decentralized network of miners. However, it is also possible that these new technologies would simply make it easier for large-scale miners to expand their operations even further. 

Scenario 3: Cryptocurrencies lose popularity.

In this setting, cryptocurrencies lose popularity and interest begins to wane. This would lead to a decrease in demand for crypto-mined coins and could cause businesses to abandon ship. This could cause a decrease in profitability and could lead to miner consolidation or even a complete industry collapse. 

Conclusion

If you’re interested in giving crypto mining a try, then we say go for it! Just remember to invest in some good quality hardware and software, and be willing to put in the time and effort to learn about different cryptocurrencies and how to mine them effectively.